Sure the utility business model is changing, but not so fast

Jared Anderson

Breaking Energy

23 July 2014

The changing utility business model has been a major theme in the news and industry circles this year, with many bemoaning that fact that as distributed generation and energy efficiency proliferate, utilities sell less of their product. The trend has even been dramatically called the “utility death spiral.” Scary. But while these are certainly challenges utility companies are dealing with, the 100-year old system is not facing wholesale change overnight.

“This is an inherently slow moving sector and it will likely take many years for these changes to take place,” Ron Norman, Global energy and utilities expert with PA Consulting Group told Breaking Energy.

Technology is the driving force, as it is in many industries. One of the most famous comparisons is the way cellular phone technology disrupted the telecommunications industry.

“At root we’re seeing the effect of technology change on utilities and those technologies are appearing in the form of distributed generation and customer awareness tools. Like every other industry that’s been affected by technology, utilities will adapt. That process of adapting is something utilities have gone through many, many times. So again, it takes place over many years,” said Norman.

“They [utilities] will be providing different products and services and in different quantities than they currently provide and the rate structures will look different.”

“The nature of adaptation can be wide. Nobody really knows what exactly these companies will look like in the future.”

The timeframe needed for this change to materialize will likely exceed 10 years for a lot of utilities, but the degree to which companies are impacted will depend on whether they are regulated or deregulated and the segments of the value chain in which they operate.

Some regions have unregulated generators but still have regulated utility distribution. “Entities along the value chain that have been unbundled will be impacted differently than those still operating within an integrated value chain,” suggested Norman.

“Regulated distribution utilities that only make money based on a regulated rate of return on their distribution system will be substantially affected by these changes. They will only have one place to make money. So in some cases an entire business will be impacted by these regulatory changes as opposed to companies that also own transmission and generation assets,” he said.

The net metering debate

Net metering is the billing mechanism that allows residential and commercial solar energy users to supply excess power back to the grid. Utilities then credit that electricity back to the customer, so they are charged on a net basis for the power consumed. “Some utilities perceive net metering policies as lost revenue opportunities,” according to the trade group Solar Energy Industries Association.

Utilities are concerned that as more homes and businesses install solar systems, net metering policies leave them less money to maintain their infrastructure and earn a profit. Another popular argument made against net metering programs is they increase rates for non-participating customers, often lower income families that cannot afford rooftop solar systems. That segment of the debate continues with arguments and studies coming out all the time to support both sides.

So is there a way to fairly compensate solar system owners feeding power into the grid and the utilities that maintain and upgrade the grid?

Norman thinks there is, but designing these policies will be challenging.

“Yes, there are ways to establish how a distributed generator can be compensated fairly.” These could include various rate design elements, he said. “The value of that investment could be different at different times of day. You need a structure that compensates the provider of the wires and the generator of the power.”

“I don’t think net metering is dead but in its infant form it faces challenges. I don’t know how policymakers are going to tackle that one.”